Breakingviews - Apple’s value can chug well past $1 trillion

NEW YORK (Reuters Breakingviews) - It has been a long time coming, but Apple could soon be worth $1 trillion – and counting. At $943 billion on Monday, the tech giant is close to being the first company to pass that threshold in market capitalization, as Breakingviews predicted seven years ago. Growth has slowed since then, but customers remain loyal and today’s valuation is far from stretched. Apple’s timely focus on data privacy may help it get there.

The Apple logo is seen on the facade of the new Apple Store in Paris, France, January 5, 2017. REUTERS/Charles Platiau

The rather mundane improvements rolling out at the Apple Worldwide Developers Conference this week illustrate that the smartphone market is now largely mature. Shipments worldwide declined slightly last year for the first time, research firm IDC reckons, and should grow less than 3 percent annually over the next five years.

That said, there’s no obvious replacement for smartphones on the horizon. Apple earned $48 billion last year, mostly from iPhone sales, so this looks like base camp for the company. Phones are prone to being dropped, dunked in water or lost. Throw in small improvements, and the company can reap more per device. The average sales price per iPhone actually rose last year.

Moreover, Apple can wring more dollars out of users in other ways. Service revenue from selling apps, online storage and streaming music is rising at a 31 percent annual clip and now accounts for 15 percent of sales. Add in additional revenue from ancillary hardware, and analysts think the company can boost operating profit by 13 percent this year. It’s not hard to imagine a healthy rate of growth continuing. Boss Tim Cook is also milking the discomfort of Facebook, Google and others whose businesses rely heavily on sharing data, sometimes controversially, by contrasting Apple’s privacy-friendly approach.

Yet Wall Street has remained oddly skeptical over the years. Apple is valued at 15 times estimated earnings over the next 12 months, which is slightly less than the S&P 500 Index overall. And peers trade at a substantial premium, with Facebook at 22 times forward earnings and Microsoft and Google parent Alphabet on a multiple of 25.

That’s too large a gap. Microsoft is projected to grow roughly as fast as Apple this year. Facebook and Google are growing faster, but they are in the line of fire from consumers and regulators over data gathering and privacy worries. Apple’s conference this week may be short on pizazz, but the nearly trillion-dollar company can tweak its business without the distraction of defending it.

Breakingviews

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